SEC Charges Companies for Failing to Timely File Form D in Violation of Regulation D

On December 20, 2024, the U.S. Securities and Exchange Commission (the “SEC”) announced charges against two private companies and one registered investment adviser (the “Parties”).  These charges asserted that the Parties violated Rule 503 of Regulation D by failing to file Form D in a timely manner for several unregistered securities offerings.  

The Parties Charged

The Parties charged include GRID 202 LLC (“GRID”), a registered investment adviser; Pipe Technologies Inc. (“Pipe”), a privately held financial technology corporation; and Underdog Sports Holdings, Inc. (“Underdog”), a privately held corporation that operates a fantasy sports website and mobile app.

Since November 2021, GRID conducted unregistered offerings involving the sale of membership interests in two private funds it controlled.  GRID contacted more than 285 prospective investors to solicit investment in the offerings and engaged in general solicitation for these offerings.

From at least March 2020 to November 2021, Pipe conducted several unregistered securities offerings, reaching out to at least 140 prospective investors and engaged in general solicitation for these offerings.

From at least April 2020 to January 2022, Underdog conducted several unregistered securities offerings, reaching out to at least several hundred prospective investors and engaged in general solicitation for these offerings.

Each issuer engaged in general solicitation while reaching out to over 100 investors.  Since general solicitation was used in each offering, reliance on Rule 504 or Rule 506(c) of Regulation D, under the Securities Act of 1933 (“Securities Act”), was necessary to be exempt from registering the offered securities. Under either Rule, the issuer was required to file a Form D promptly after the first sale of securities, but failed to do so.

The Importance of Filing a Form D

Regulation D provides exemptions from the registration requirements of the Securities Act, allowing small businesses and other private entities to raise capital more efficiently.  When an issuer relies on an exemption or a safe harbor under Regulation D, they are required to file a Form D with the SEC within 15 days after the first sale of securities in the offering.  The SEC uses these filings to assess whether Regulation D is appropriately balancing investor protection with facilitating capital formation. 

Additionally, timely Form D filings are crucial for several reasons, including:

• Investor Protection: They provide transparency and allow investors to evaluate for due diligence and research purposes whether companies are complying with federal securities laws during their offerings.
• Market Oversight: The filings help the SEC, state securities regulators and self-regulatory authorities monitor and enforce compliance with securities laws and regulations.
• Capital Formation: Timely filings give investors a clearer picture of capital raising activities.

As Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement, stated, “Form D filings are crucial sources of information on private capital formation, and compliance with the requirement to make such filings in a timely manner is vital to the Commission’s efforts to promote investor protection while also facilitating capital formation, especially with respect to small businesses.”

The Consequences

The SEC’s charges claimed that the failure to make the required Form D filings deprived the SEC and the marketplace of vital information relating to nearly $300 million in unregistered securities offerings.

In response to the charges, GRID, Pipe and Underdog neither admitted nor denied the findings, have agreed to cease and desist from violating the charged provisions, and agreed to pay civil penalties of $60,000; $195,000; and $175,000, respectively.

Conclusion

The SEC’s enforcement actions underscore the critical role that timely regulatory filings, such as Form D filings, play in maintaining transparency and integrity in private securities offerings.  Companies engaging in such offerings must remain diligent in filing their forms on time to ensure they comply with the law and avoid potential penalties.  For financial institutions, private companies, and investors, this case serves as a reminder of the importance of adhering to regulatory requirements.